Registered Investment Advisor – Hampton Roads, Virginia

Five year returns can be misleading

Chris Latham at Financial Advisor talks about the words “long-term” and the fact that there is no consensus about its meaning. If one year is not long-term, is 2, 5, 10 or more? The longer the period being measured, the closer we get to actually talking about the long-term. Of course we have to take into consideration that fact that our individual time horizons are not infinite. A 20-year-old can afford to think in terms of a 70 year time span, someone 70 years old cannot.

Many people will look at a five-year span and make a judgement about the market, a stock or a mutual fund. But there’s something revealing that tells us that we can be misled by these statistics.

In fact, one calendar year can make all the difference in the minds of stock investors. Compare the five-year period ending in 2012 with the same span ending in 2013. They look like two completely different time frames, even though they share three identical years. Counting dividends, the five years ended in 2012 returned 1.7% on the S&P 500, while the five years ended in 2013 returned 17.9%, the Times reports.

The long crawl up from the depths of the Great Recession accounts for the poor showing in the first snapshot, while last year’s 32.4% market rise accounts for the apparent miracle in the second.

Be cautious when viewing data that changes the beginning and end-points. And keep in mind that market indexes are not important as a way of achieving financial freedom.